The Mexican peso: myths and realities of one of the most stable currencies of the moment | Economy

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A buyer pays for fruit with a 100-peso bill at a stand in the Central de Abastos in Mexico City.Susana Gonzalez (Bloomberg)

The bets against him have been accumulated and his weakness has been predicted, but the Mexican peso remains stable amid big stock market crashes globally. For many in Mexico, its performance has to do with the government’s macroeconomic policies, but what really moves the peso? And, perhaps more urgently, will the predictions come true?

The peso is not like other developing country currencies. The second most liquid among emerging currencies, after the Chinese renminbi (or yuan), the Mexican peso is very easy to buy and sell in global financial markets 24 hours a day, five days a week. This has made it the favorite of operators, or traders, who want to bet for or against emerging countries around the world. That is, it is used as a proxyso if the investor is optimistic about another emerging market, say Turkey, he would buy Mexican pesos as an investment if he cannot buy lira.

This makes it a very sensitive currency, and it is by design. Traumatic devaluations in the 1980s and 1990s installed the exchange rate in the Mexican psyche and forged in the authorities a conviction that the currency should float freely. In this way, the currency would be the first channel to absorb economic shocks, both external and internal. This is why when global events occur, such as the so-called Brexit in the UK or the war in Ukraine, the peso is one of the first currencies in the world to react.

For years, investment banks on Wall Street predicted that the Mexican peso would be the emerging currency that would appreciate the most, and every year the peso disappointed. This was particularly evident during the previous Federal Administration, which promoted the opening of the economy to foreign capital as the “mexican moment”. Things are very different today. Globalization is in clear decline, the Government of Andrés Manuel López Obrador has closed the energy sector to private parties, and, while a depreciation of the Mexican peso is predicted, it has appreciated more than 7% from its lowest price in the so far this year.

Mexico has seen strong inflows of dollars into its economy via exports, remittances and foreign direct investment, which explains its stability amid the current global financial turmoil, says Gabriela Siller, director of economic analysis at Basic Bank. Also, the rise in the interest rate reference by the Bank of Mexico creates an attractive return compared to the US, so investors continue to buy Mexican assets.

The stability of the peso “has nothing to do with the economic fundamentals of Mexico,” Siller points out, “even the initiatives and reforms that the Administration has carried out generate greater uncertainty and that adds a little instability to the Mexican peso. If these initiatives and reforms had not taken place, if there was no risk aversion on the Mexican economy, I believe that we could easily be seeing exchange rate levels close to 19.50 per dollar”. The price on Friday is 19.83.

The events of the last few months support Siller’s thesis. In July, The United States initiated a process against López Obrador’s energy policy, putting at risk the free trade agreement that has boosted Mexican exports for decades. In the worst case scenario, The US could impose tariffs on Mexico, generating losses of billions of dollars to entire sectors of the economy. But the announcement did not move the exchange rate.

Nor did the peso react three weeks ago, when the official in charge of these processes, Tatiana Clouthier, I quit. Nor this week, when Raquel Buenrostro, who replaced Clouthier as Secretary of the Economy, asked for resignation directors and technicians with memory and knowledge of foreign trade. In other emerging countries, these events, under these conditions, would have caused a movement in the exchange rate, but in the case of the Mexican peso, this is not the case.

Until a month ago, operators in the largest futures market in the world, the Chicago Mercantile Exchange (CME), bet for 11 consecutive weeks on a depreciation of the Mexican peso. “For a time, these speculative movements did have a significant impact on the price of the Mexican peso,” says Siller, “however, now that impact is no longer seen.” In addition, on October 20, a report by the Moody’s Analytics firm predicted that the peso could depreciate up to 20% against the dollar if the US enters a recession, which generated nervousness.

“I do not share that opinion because exports are growing a lot, remittances also continue to grow,” says Siller, “if the United States slows down or falls into a slight recession, it will imply a depreciation, but moderate, of the Mexican peso. It can depreciate at 20.30 per dollar at the end of the year and the following year trade on average at 20.77″. This would imply a drop of between 2% and 5%.

Luis Gonzali, market strategist at the firm Franklin Templeton, declares himself skeptical of the exchange rate forecasts. In reality, argues the mathematician, the exchange rate “can move many times in a counterintuitive way to what is happening in an economy and, in the short term, it is a random variable that moves with the same probability up as it does down ”.

Historically, inflation in Mexico tends to be higher than in the US and this means that, in the long term, the peso tends to depreciate against the dollar. “So, it is not unreasonable to say that, going forward, we could see a depreciation,” says Gonzali. But the current moment is “a very particular episode”, says Gonzali. Never before has so much money been injected into an economy as was done in the US and Europe during the covid-19 pandemic. In addition, an unpredictable factor, such as the Russian offensive in Ukraine, directly influences the exchange rate.

The markets are, deep down, emotional and the Mexican peso is one of the most sensitive. “At the end of the day, economic models are based on the assumption that eventually the variables or the economic system will come to an equilibrium. But that balance is a pipe dream. We never reach that balance, we are always out,” says Gonzali. “The exchange rate is one of the most complicated variables to forecast because it is the first that absorbs all blows, expectations, fears, euphoria. Predicting its level would imply predicting how people are going to feel tomorrow.”

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